Waters Leads GSE Reform Panel Discussion

WASHINGTON — House Democrats stepped out of the partisan fray Friday to talk about housing finance reform among their own.

Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, hosted a panel discussion with more than half a dozen lawmakers and a number of policy analysts, many of them moderate or left-leaning, to discuss strategies for overhauling government-sponsored enterprises Fannie Mae and Freddie Mac.

"This type of setting allows for more conversational dialogue to occur and to help inform us as we engage in committee hearings and markups. Simply put — we can argue, we can disagree, we're not limited to five minutes, so I think that way we'll have an opportunity to get some real interaction," said Waters, who served as moderator of the discussion.

Indeed, the tone was much more collegial than the typical banking panel hearing on the subject, which generally divides sharply along partisan lines.

The California Democrat also offered attendees a cautionary tale about the pitfalls of not being conversant on some of these difficult issues.

"When the subprime meltdown took place and Lehman Brothers failed, and when [then Treasury Secretary Henry] Paulson came to us with this three or four page proposal for a bailout, nobody could say no, nobody had an alternative, nobody knew what to do," she said.

While lawmakers and panelists conceded that any legislation will be extremely difficult to move in the Republican-controlled House, the tone of the debate remained relatively positive.

"Whether it's the administration or whoever, whatever side of the aisle starts to move forward, we've got to know what we're doing and we've got to understand everything that we can possibly understand," Waters said.

The wide-ranging debate touched on a host of substantive issues, including the actions taken by the Federal Housing Finance Agency, the mission of the housing finance system and ways to improve access to credit for minorities.

Waters kicked off the debate by asking panelists about the work of Ed DeMarco, the controversial acting director of the FHFA, and the possible need for a new director. Liberal groups have been pushing for DeMarco's removal for his views on principal reductions and other policy decisions, but it remains to be seen whether any Obama nominee could clear the Senate in the current political climate. While most panelists were sympathetic to the position DeMarco has been put in, having run the agency as an unconfirmed director since 2009, several agreed that the work he does now could ultimately limit some of the choices for reforming the industry down the line.

Julia Gordon, director of housing finance and policy at the Center for American Progress, pointed to DeMarco's proposal for a single securitization platform as one example.

"The securitization platform — it makes a lot of sense for a lot of reasons to build a single infrastructure, a set of pipes if you will," Gordon said. "But when you're building those pipes, you're making a lot of implicit choices, embedded decisions, particularly concerning access to those pipes and what types of institutions have access, and that has implications for market concentration and access to credit."

Still, Ellen Seidman, an advisor to the Urban Institute and former director of the Office of Thrift Supervision, added that DeMarco's work at FHFA also shows the benefits of not over-legislating complex issues like housing finance.

"What it also says to me is that he's teaching us a really important lesson, which is, there's some value in not legislating details," she said. "To legislate basic principles and basic structure and then understand that you've got an administrative system that will help shape it, is actually an important positive lesson. Obviously if you let it go too long with somebody who's not confirmed, it can run you into trouble."

Panelists also discussed the numerous challenges involved with moving the system toward reform, even if an end goal could one day be agreed upon.

"The issue I think that policymakers that we've been speaking with struggle with is the transition," said Jim Millstein, chairman and chief executive officer of Millstein & Co. "It's how do you get from a place where today, the government's the only game in town? It's backing almost 100 cents of almost every mortgage in America through Fannie and Freddie and Ginnie, to a place where we have more private capital. So how do you transition in?"

Any transition to a new system is also likely to come with a host of unexpected consequences. The Dodd-Frank reform law, for example, contains several provisions addressing the housing finance system, some of which, like the qualified residential mortgage rule, are still being written. The Consumer Financial Protection Bureau's qualified mortgage rule is also likely to play an increasingly important role in the market if the GSEs are phased out.

"The qualified mortgage will affect how financial institutions do business. But it won't for a long time, because Fannie and Freddie are currently setting the underwriting terms. They will in 2014 when the qualified mortgage rule takes effect," said Nela Richardson, a senior economic analyst at Bloomberg Government. "As 90% of the market with FHA, there's only one underwriting standard that matters, and that's the largest purchaser in the market. So if we want to have some say as a market or as a government about what's getting underwritten, we have to reform the GSEs."

Access to the market for a variety of institutions was also a concern for lawmakers and speakers alike, amidst the larger ongoing debate in Congress about whether some banks are "too big to fail." Some, including Rep. Mel Watt, D-N.C., who is rumored to be a top candidate to be nominated as FHFA director, warned that if just a handful of institutions end up dominating the private market, it could lead to greater instability.

"The thing I worry about is how you do that without the private market creating entities are so dominant in this market that they become 'too big to fail.' And you really give the entirety of the private market access to be able to play," asked Watt.